Question

7. Over the backward bending portion of the labour supply curve, a. The substitution effect of a wage change dominates the income effect. b. The wage elasticity of labour supply is positive. c. Leisure becomes an inferior good. d. The wage elasticity of labour supply is negative. 8. Identify the truthfulness of the following statements: 1. The substitution effect of a wage change is ambiguous in its direction. II. Direction of the income effect depends on whether the good is a normal or an inferior good. a. Both I and II are true. b. Both I and II are false. C. I is true, Il is false. d. I is false, Il is true. 9. Which of the following programs is an example of a demogrant? a. Old Age Security (OAS) b. Employment Insurance C. Canada Pension Plan (CPP) Benefits d. Canada Worker Benefits e. The Guaranteed Income Supplement

Answer 1

7. d.) The wage elasticity of labor supply is negative.

When a labor is at a stage where his curve is backward bending, then his wage elasticity is negative and an increase in wage rate leads to decrease in labor supply. The rest of the options does not follow. The income effect dominates substitution effect and leisure is a normal good and is not an inferior good that is why leisure demanded will go up.

8.) a.) Both I and II are true as because the wage change may either increase or decrease. AND direction of income effect depends on whether the good is normal or inferior good. For normal good income effect is positive and in inferior goods the income effect is negative.

9.) Old Age Security and Canada Pension Plan benefits may be the examples of demogrants as because demogrants involve grants or pension schemes based on age or sex.